COMPANY LAW REFORMS
In previous editions of Business Briefly we reported on the progress of the Corporate Law Economic Reform Program Act. The principal provisions of this Act commenced operation on 13 March 2000.
The Act heralds significant changes in corporate law over a number of areas including:
In this edition of Business Briefly, we will report on the changes to the responsibilities of directors and other officers. The other areas affected by the Act will be reported on in future editions of Business Briefly.
New Standard of Care
This duty has been rewritten so that it is clear that the standard of care required of a director or other officer is to be assessed in light of the particular circumstances of both the company in question, and the officer concerned. This means that there may be a divergence between the standards of care which will apply to officers of large corporations compared to those applying to small private companies. In addition, the requisite standard of care will depend on the particular qualifications and experience of the officer in question.
Safe Harbour
Under this new statutory rule, a director or other officer of a company will be taken to have complied with the duty of care if, in making a "business decision", he or she:
This rule is certainly no panacea for directors liability for a number of reasons. First, the rule only applies to "business decisions". This means any decision to take or not to take action in respect of a matter relevant to the business operations of the corporation. The rule does not protect a director from any inaction which is the result of a failure on the part of the director to make a conscious decision.
Secondly, the rule only gives protection in terms of the decision made and not in relation to the process leading up to the decision. The rule will not protect directors who make decisions on the basis of manifestly inadequate information.
Finally, the rule only protects directors in relation to their duty of care and diligence under both the common law and under the Corporations Law. It does not protect directors in relation to breaches of other provisions of the Corporations Law, or for breaches of other legislation.
Dilemma for Directors
One of the most controversial aspects of the amendments is the inclusion of a provision which permits directors of wholly owned subsidiaries to act in the best interests of the parent company in certain circumstances.
The Corporations Law now permits directors of a wholly owned subsidiary to act in the best interests of the subsidiary's parent company provided that:
Although the above rule gives some level of protection to nominee directors appointed to subsidiary boards, parent companies should be wary of giving nominee directors appointed to subsidiary boards authority to prefer the interests of the parent over the interests of the subsidiary. This is because of the dangers that the parent company itself will be regarded as a "shadow" director of the subsidiary and as having acted contrary to the best interests of the subsidiary.
Passing the Buck
Delegation of Powers
The Corporations Law now expressly authorises the delegation of directors' powers subject to any restrictions in the constitution of the company to the contrary. A director making a delegation will be insulated from responsibility from the delegate's actions provided that:
It has been suggested that because a director must reasonably believe "at all times" that the delegate will act properly, the director may be obliged to monitor the actions of the delegate on an ongoing basis in order to be protected under these new provisions. Reliance on Others
The Corporations Law now makes it clear that a director may safely rely on information and advice provided by third parties where the following conditions are met:
In order to claim protection under this rule, the director must honestly rely on the information or advice given and must have made an "independent assessment" of the information or advice.
In contrast to the new rule in relation to delegation of powers, a director's reliance on information or advice is presumed to be reasonable unless proven otherwise.
Who pays?
The CLERP Act substantially rewrites the prohibitions contained in the Corporations Law preventing a company from indemnifying an officer from legal costs and liability except in limited circumstances. Although the exceptions to this prohibition (such as where the officer successfully defends proceedings) were previously contained in the Corporations Law, the new provisions overcome some of the inadequacies of the previous provisions in a number of ways.
First, the provisions make it clear that there is no requirement to "wait and see" if the officer is successful in defending the proceedings before the company can meet the officer's expenses. The Corporations Law now expressly provides that the company may make an advance to an officer in respect of legal costs before the outcome of the proceedings are known. In addition, the Corporations Law now makes it clear that the officer's expenses in relation to settlement of a claim before judgment can be met by the company.
Access to Evidence
One of the difficulties for former directors under the old Corporations Law and under common law was that the right of access to the company's books was only granted to current directors of the company. Any former director faced with litigation had difficulty in accessing documentary evidence relating to the claim.
The Corporations Law now confers on both current and ex-directors of a company an enforceable right to inspect the company's books at reasonable times for the purposes of legal proceedings. This right continues for 7 years after the person ceases to be a director.
Downside for Directors
Not all the changes heralded by the CLERP Act are for the protection of directors. The Act introduces a "Statutory Derivative Action" provision which potentially makes it easier for shareholders and others to bring legal proceedings on behalf of the company against the company's directors.
Any shareholders wishing to bring legal proceedings on behalf of a company will first be required to apply for leave of the court.
It is important for any shareholders considering bringing a statutory derivative action against the directors of a company to appreciate that any damages recovered from the statutory derivative action will flow to the company, rather than to the shareholders bringing the action.
Word of Warning
The above is a general overview of the way in which the Corporate Law Economic Reform Act modifies the Corporations Law provisions dealing with the matters set out above. The way in which these new provisions will effect any officer of a company will depend on the particular circumstances of the officer and company in question.
Accordingly, this publication should not be regarded as legal advice. If you are of the view that the new provisions of the Corporations Law may impact upon you or your company, we strongly suggest you seek specific legal advice.
For further information, please contact Johanna Churchill on 61 8 8210 1236 or e-mail jchurchill@normans.com.au.
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